From Manufacturing Led Export Growth to a 21st Century Inclusive Growth Strategy:

Transcription

1 From Manufacturing Led Export Growth to a 21st Century Inclusive Growth Strategy: Explaining the Demise of a Successful Growth Model and What to Do About It Joseph E. S+glitz WIDER Conference September 2018

2 I. Export- led growth model behind 20 th century growth miracles Unprecedented growth in East Asia closing the gap in income per capita/standards of living with advanced countries That model won t be working in the future in the way and to the extent that it did in the past 2

3 End of old model VicBm of own success: producbvity exceeds rate of increase in demand (share of manufacturing in GDP declining everywhere as next slide shows) Some verbcal disintegrabon of service components of manufacturing gave appearance of more rapid disappearance of jobs VerBcal disintegrabon can have real consequences (e.g. for wages and flows of knowledge) Similar to what happened to agriculture in advanced countries almost a century ago 3

4 Even with emerging markets taking larger share of manufacturing jobs, and with ship of jobs from China to Africa, new manufacturing jobs will only absorb a fracbon of new entrants into labor force Can sbll have impacts disproporbonate to size Countries may have a natural comparabve advantage in some niches (or in some cases, even be able to create a comparabve advantage) But unlikely to have impacts that manufacturing export led growth had in China and East Asia Because of robobzabon, advantages of cheap labor will diminish 4

5 Manufacturing Share of GDP (%) 5

6 II. New Thinking about development What separates developing countries from developed is not just a disparity in resources, but a disparity in knowledge and insbtubons Development entails a structural transformabon There can be growth without structural transformabon especially common in resource dependent countries But such growth won t be sustained Markets on their own don t manage these transformabons well CriBcal impediments imposed by capital market imperfecbons, important externalibes and coordinabon failures Government needs to assume an important role 6

7 New understandings have led to new strategies New understandings have led to movement from a focus on projects to policies and then to insbtubons Corresponding to the realizabon of the importance of not just physical capital, but human capital, social capital, and knowledge capital And a change in norms and mindsets Including the mindsets about change is possible a movement away from tradibonal society towards modernizabon In the West, associated with the Enlightenment 7

8 New understandings replected in Stockholm Statement 1. GDP growth is not an end in itself 2. Development has to be inclusive 3. Environmental sustainability is a requirement, not an opbon 4. The need to balance market, state, and community 5. Providing macroeconomic stability But this does not just mean balancing budgets or focusing exclusively on inflabon 8

9 Stockholm Statement 6. A^ending to the impact of global technology and inequality Key issue is not developed vs. less developed countries, but appropriate treatment of labor, in both developed and developing countries Requires investment in human capital CreaBng new instruments of redistribubons within and between countries 7. Social norms and mindsets ma^er Bringing the insights of modern behavioral economics to bear in development economics EffecBve ways of altering behavior (savings, ferblity, etc.) 9

10 Stockholm Statement 8. Global policies and the responsibility of the internabonal community Recognizing the interdependence of countries That the policies of the large rich countries have large externalibes on the rest of the world, which they open don t take into account (including their monetary, regulatory, trade, and migrabon policies) But tax havens affect all countries InternaBonal agreements cover only part of these arenas Climate change agreements do not go far enough Do not cover cost of adaptabon by poor countries Developed countries have not lived up to their commitments of.7% of GDP in aid 10

11 Marked change from the Washington Consensus With its narrow concepbon of the goals and instruments of development and parbcipants in the development process 11

12 Broader goals to replect challenges of the 21 st century Inclusive growth Trickle down economics doesn t work Greater inclusivity can lead to more robust growth There are policies that can simultaneously increase equality and growth Employment generabon is central to inclusive growth (especially where labor force is to grow rapidly as in Tanzania) Seeing equality and growth as complements rather than subsbtutes is major change in development thinking Climate change and other environmental goals Good macro- economics is more than price stability 12

13 More instruments More instruments for monetary policy (now embraced even by advanced countries, e.g. in QE and macro- prudenbal regulabon) More instruments for macro- stability (now embraced in new InsBtuBonal View of IMF, on capital controls) More instruments for developmental transformabon notably industrial policies, including for agriculture and services (so more appropriately labeled as learning, industrial and technology (LIT) policies) More instruments for maintaining full employment acbve labor market policies 13

14 Clearer distinctions between means and goals PrivaBzaBon, markets are not ends in themselves they are only (possibly) means to the broader goals described earlier Other variables too need to be looked at through this lens InflaBon, budget deficits, current account deficits But not a^ending to some of these variables in a Bmely way may make it difficult to achieve our goals 14

15 Greater participation: a balance between markets, government, and society Not just markets, but government and civil society Understanding limitabons of markets Systems of checks and balances cribcal Media and civil society can play a pivotal role All successful development has entailed government playing an important role the development state It has a mulbplicity of roles Providing enabling condibons for market to work Including good physical and insbtubonal infrastructure, an educated labor force RegulaBng markets prevenbng negabve externalibes (including exploitabon and excessive volablity) PromoBng development more directly learning, industrial and technology policies Understanding the big picture including the problems posed by excessively rapid populabon growth which requires a^enbon to accelerabng the demographic transibon 15

16 III. Deconstructing success of export led manufacturing model Open economy allowed one to avoid complexity of material balance equabons all one had to have was enough foreign exchange Export led growth generated necessary foreign exchange Didn t need to generate demand to absorb new supply No need to worry about demand constraints Flexible and correctly managed exchange rate, open economy, and a^enbve producers suffice to absorb supply 16

17 Deconstructing success Exports provided basis for learning What separates developed and less developed countries is a gap in knowledge Transfer of technology could be accomplished in numerous ways (buying technology, FDI) Important spillovers to other industries InsBtuBonal spillovers (e.g. educabon) even to other sectors Demand for educated individuals of benefit elsewhere in the economy Exports provided basis for tax revenues Finance needed for government expenditures infrastructure, educabon, technology Hard to tax informal sector 17

18 Deconstructing success Generated employment in urban sector key in supporbng structural transformabon and widely shared growth Generated jobs for new entrants into the labor force and raised real wages Export- led manufacturing naturally combined structural transformabon and urbanizabon, movement to a learning economy, openness that meant one could simply focus on foreign exchange constraint (ensuring that one had the foreign exchange one needed), and job creabon for new entrants into the labor force to maintain reasonably high employment 18

19 Mechanisms for promoting exports Access to credit at near commercial rates provided incenbves for entrepreneurs Limited direct support Variety of industrial policy instruments Natural system of accountability Successful firms proved profitable 19

20 IV. Similar outcomes will require a multifaceted growth strategy with different facets replecting different aspects of manufacturing export- led growth Manufacturing Agricultural Resources Services Africa suffered from pre- mature deindustrializabon, neglect of agriculture and services, with natural resources not being used to promote development to the extent they should Government has to take an acbve role if there is to be successful structural transformabon Shadow prices for learning, learning spillovers, jobs, and foreign exchange may also entail deviabons from market- only solubons 20

21 Premature deindustrialization as a result of structural adjustment programs 21

22 Manufacturing Limited ability to generate jobs especially with advances in technology Limited ability to generate tax revenues with tax compebbon Need internabonal agreements to limit Appropriately designed policies can sbll play an important role Industrial policies (to be described below) But WTO circumscribes use of subsidies Needs to be more directed, where possible, taking advantage of natural advantage (mineral resources) 22

23 Agriculture Most important basis of employment Can be restructured in ways that are more dynamic, with more learning, learning to learn, a kind of transformabon in situ Modern agriculture can be very advanced Focus on non- labor saving innovabons be^er crop mix, be^er ferblizers Given the extremely low producbvity of agriculture in SSA, there is enormous scope for modernizing agriculture The transformabon of farming from tradi,onal prac,ces to modern farming can be an exemplar of general societal transformabon entailing modernizabon Can reduce need for foreign exchange for imported food; in some cases, large scope for agricultural exports Can reduce migrabon pressures 23

24 Role of agricultural in structural transformation The African Center for Economic TransformaBon, in its second major report released in October, 2017 argued: Agriculture presents the easiest path to industrializa,on and economic transforma,on. Increasing produc,vity and output in a modern agricultural sector would, beyond improving food security and the balance of payments (through reduced food imports and increased exports) Sustain agro- processing, the manufacturing of agricultural inputs, and a host of services upstream and downstream from farms, crea,ng employment and boos,ng incomes across the economy. 24

25 Promoting agriculture Role of government provided extension services Importance of care in the design of IPR regime Role of government in cerbfying/providing quality seeds, ferblizer Role of government/ngo s in providing credit prevenbng exploitabon Role of government in providing markebng services 25

26 Natural resources Standard lessons of resource curse have not yet been learned by most countries Need to maximize revenues from natural resources from well designed aucbons and contracts It may be necessary to aucbon off different parts of the producbon process, rather than to have a bid for a manager Contracts need to be complemented by excess profit taxes Countries need to be careful not to sign investment agreements that circumscribe ability to change taxes and regulabons Those that have signed such agreements should exit or renegobate (e.g. South Africa) Even with these agreements, it may be preferable to change contracts (e.g. Israel) Sovereign wealth fund both to manage cyclical variability and to prevent exchange rate appreciabon Manage exchange rate for compebbveness in other sectors 26

27 Natural resources The development of a country s resources should be, to the extent possible, part of the development strategy More than just source of foreign exchange Industrial policies can exploit a variety of forward, backward, and horizontal links Possible losses in SR in return for long run learning But careful appraisal of trade- offs required Absence of current spillovers is not necessarily evidence that there aren t potenbally long run profitable linkages. 27

28 Service sector Move to service sector may have many implicabons Smaller producbon units Part of explanabon of seemingly lower produc+vity growth Lower ability/incenbves to engage in research Some of observed lower producbvity growth may be measurement problem But not inevitable More need for cooperabve R & D, government R & D Larger producbvity differences across firms Increased need for government to push creabng a learning society to reduce producbvity differences Many services can be more easily inserted into the global economy through internet Especially if there can be quality cerbficabon, either through peer monitoring or cerbficabon services Increasing need for skills training, including languages 28

29 Many different service sectors Housing services Process of urbanizabon will require large investments With large job creabon potenbal Government will need to take a more acbve role Including in planning livable cibes important part of well- being Extensive market failures in zoning, mortgage finance Government plays an important role in many key service sectors (though less than in some other regions) EducaBon Health Will need to expand that role Especially important as both part of development strategies and end objecbves Low educabon levels also presents an increasing challenge to modernizabon, as the importance of learning grows 29

30 Distribution of active population according to education level Nigeria (2012) Guinea (2012) Benin (2012) Ethiopia (2011) Mozambique (2011) Tanzania (2010) Malawi (2010) Gabon (2012) No educabon Primary Secondary Higher Note: Only countries with data aper 2009 are included. Number are in percent. Source: Demographic and Health Survey, reproduced from Chevallier and Le Goff

31 V. Industrial/LIT Policy Industrial policies were central to almost all countries that caught- up with the technological fronber and became developed Have played an important role even in advanced countries Entrepreneurial State SME lending All countries have industrial policies (whether they know it or not) Decisions about infrastructure, educabon, research affect the direcbon of the economy US had an industrial policy Mostly in defense department Hidden subsidies in tax structure Even bankruptcy law was an implicit industrial policy: favored the financial sector (credits) vs borrowers; especially favorable treatment of derivabves and educabon loans 31

32 Industrial/LIT Policy Industrial policy: acbons that aim to alter the allocabon of resources (or the choice of technology) from what the market would bring about. Not confined to industry but also to policies aimed at other sectors e.g. finance or IT and agriculture. More accurate to call it Learning, Industrial and Technology (LIT) policy LIT policies take many different forms African examples of LIT for IT provided by Rwanda and for agriculture by Ethiopia (earlier Kenyan tea). Green revolubon in South Asia facilitated by policies of price support seqng a floor on output prices as well as input subsidies, including notably for electricity, that enhanced the profitability of tube- well irrigabon The most famous examples are East Asian developmental states 32

33 LIT Policies LIT policies target the dynamic capacibes of the economy. Societal transformabon depend on learning, in all its forms including closing the knowledge gap that separates developing and developed countries, learning to learn, and closing the large gaps in knowledge within a country Crea)ng a learning society is more than just a ma^er of educabon; it entails trade and investment policies, labor policies, compebbon policies, etc. Targets sectors with more learning capabilibes and learning spillovers Possible conflict between policies that enhance stabc efficiency and those that contribute to learning Striking the right balance is at the core of success Neoliberal WC policies paid no a^enbon to learning, seemingly unaware of the potenbal conflict, and thus failed to strike the right balance 33 AllocaBng a given amount of resources in a way that is consistent with sta,c efficiency, as desirable as it may seem, may actually impede development and growth

34 Rethinking industrial policy General principles of industrial policies sbll apply in our mulb- pronged strategies (including for agriculture) Need to idenbfy learning and learning spillover service sectors and agricultural acbvibes These can have much of the benefits of the learning provided by manufacturing Industrial policies need to exploit linkages with natural resource one of the country s key comparabve advantages 34

35 VI. Reassessing Comparative Advantage Old theory based on stabc comparabve advantage; new strategies must be based more on dynamic comparabve advantage Where would Korea be if it had focused on stabc comparabve advantage? Capital highly mobile Many aspects of technical knowledge (especially when embedded in machines) relabvely mobile Skilled labor relabvely mobile 35

36 Real source of comparative advantage Skills, health and discipline of work force Embedded Knowledge InsBtuBons and norms InsBtuBonal infrastructure Physical infrastructure ReputaBon ( branding ) All of these affect Ability to a^ract and retain talent Young people care about the environment, about meaning in their work, and cooperabon and challenge (including intellectual challenge) in the work place Ability to a^ract and retain capital Hard but essenbal to change these in construcbve way Enhancing these should be central to development strategy 36

37 VII. How can developed countries help MulBple instruments Fairer, pro- development global trade regime Pro- development IPR regime Pro- development investment agreements Pro- development/more stable financial markets/regulabons Stymieing flow of corrupt money shuqng down secrecy havens Fairer mulb- nabonal tax regime 37

38 Global reserve system, to replace current dollar based system With annual emissions awarded to developing countries SubstanBal amounts of transfers of purchasing power Would simultaneously increase global aggregate demand and global stability (addressing Triffin Paradox) More equitable than the current regime, where poor countries lend money to rich at low interest rates, and borrow back funds at much higher interest rates 38

39 VII. Concluding remarks: Reformulating development thinking Success in development over past 60 years was greater than anyone anbcipated contrast Myrdal s predicbons for Asia with what happened There is an enormous gap in knowledge, as well as in resources, that has to be closed Most of the advanced countries are engaged in service sector 80% or more So if there are disparibes in standards of living, it relates to producbvity in these service sectors There are huge disparibes in producbvibes within countries, even greater between countries 39

40 Reformulating development thinking The basis of the success of growth over past half century was export- led growth We have deconstructed what enabled manufacturing to provide this growth spurt, this structural transformabon It won t be able to do so in the future to anything like that extent There has to be another strategy that performs some of the essenbal roles that manufacturing export- led development did 40

41 Reformulating development thinking Successful development policy will need to be explicitly more mulb- pronged, addressing separate challenges that manufacturing sector addressed simultaneously We have shown how a coordinated {Agriculture, Manufacturing, Mining, Service Sector} strategy has the prospect of a^aining the same success of the old manufacturing export- led strategy Government will need to play an important role in the new structural transformabon towards a modern 41

42 Comprehensive Development Strategy In short, what is needed is a comprehensive development strategy Leading to inclusive growth With inclusive parbcipabon Including a balance between markets, government, and society Based on these new understandings of what leads to successful economic and societal transformabon And creabng new dynamic comparabve advantages 42